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Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.70 at the end...

Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.70 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.8 percent, forever. The appropriate rate of return on the stock is 14 percent, compounded quarterly.

  

What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  Stock price $
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Homework Answers

Answer #1

Quarterly Dividend for 12 quarters (D) = $ 1.70

Required return per quarter (Ke) = 14% / 4 = 3.50% per quarter

Quarterly growth rate (g) = 1.8%

Using Gordon's dividend growth model,

Value of stock at the end of 12 quarters = D x (1+g) / (Ke - g) =  1.70 x (1+1.8%) / (3.5%-1.8%) = $ 101.80

Current stock price:

No of Quarters (N) = 12

Dividend per Quarter (PMT) = $1.7

Future value of stock (FV) = 101.80

Required return per quarter (Y) = 3.50% per quarter

Therefore, using financial calculator or PV function in excel,

Current stock price = $ 83.80

Thumbs up please if satisfied. Thanks :)

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